5 Cheap Dividend Stocks To Buy And Hold Forever

A common strategy for income-orientated investors is purchasing dividend stocks and holding onto them for many years. This is from the ability of certain firms to offer consistent yields and strength. These two factors are the basic philosophy that are used in determining if owning a particular stock over long periods of time will provide substantial rewards. As a result, a number of strategies have been developed around purchasing and holding positions like this to achieve these objectives.

The problem with this kind of thinking is that there could be changes in the fundamentals of the company. This is when there is the possibility that the dividend could be reduced (which increases the total amounts of volatility). To determine if Altria (NYSE:MO), Exxon Mobil (NYSE:XOM), PepsiCo (NYSE:PEP) General Electric (NYSE:GE) and Merck (NYSE:MRK) meet these standards requires examining these stocks for the ability to deliver consistent earnings as well as dividend growth.

Altriayields 5.70%. The firm has profit margins of 21.16%, operating margins of 39.63% and a return on equity of 72.12%. The company has a dividend payout ratio of .828. The balance sheet includes revenues of $16.41 billion, $3.04 billion in cash and $13.69 billion in debt. During the past year the earnings have been consistently rising from $0.44 to $0.56 (see below).

Earnings per Share for Altria

December 2010

March 2011

June 2011

September 2011

Estimate

$.44

$.44

$.53

$.56

Actual

$.44

$.44

$.54

$.56

Click to enlarge

These facts are illustrating how Altria has the potential to provide consistent dividends and earnings growth. The strong profit and operating margins are showing increased bottom line growth numbers between 21.16% and 39.63% per year. The return on equity is a sign that executives are taking any kind of working capital received and making it provide high returns to investors. The payout ratio is illustrating how the company is using most of their profits to provide shareholders with dividends. Moreover, the earnings have been consistently rising, which is what warranted my inclusion of Altria among the best of sin stocks last year. In the future, Altria will use this as a way of being able to continue providing consistent returns and dividend yields to shareholders. This means that investors who own the stock over long periods of time will have above average levels of income and growth.

Exxon Mobilyields 2.20%.The firm has profit margins of 9.75%, operating margins of 12.87% and a return on equity of 26.85%. The dividend payout ratio is 0.227. The balance sheet includes $419.54 billion in revenues, $11.02 billion in cash and $16.76 billion in debt. During past year the earnings were stable until a drop in the last quarter to $2.13 (see below).

Earnings per Share for Exxon Mobil

December 2010

March 2011

June 2011

September 2011

Estimate

$1.63

$2.08

$2.32

$2.12

Actual

$1.85

$2.14

$2.18

$2.13

Click to enlarge

These numbers are showing how Exxon Mobil is a good stock to hold for the dividends. This is based on the strong revenues in comparison the cash and debt. The ideal time to purchase the company for growth is once earnings have begun to stabilize. This means watching for the firm to consistently beat $2.18 on a regular basis. As a result, the medium term earnings must stabilize before the stock can realize significant increases in valuation. This is when Exxon Mobile is an ideal candidate as a long-term hold.

General Electricyields 3.40%. The company has profit margins of 9.89%, operating margins of 13.59% and a return on equity of 11.80%. The dividend payout ratio is 0.519. The balance sheet includes $151.17 billion in revenues, $91.37 billion in cash and $466.13 million in debt. In the past year the earnings have declined from $0.35 to $0.31 (see below).

Earnings per Share for GE

December 2010

March 2011

June 2011

September 2011

Estimate

$.32

$.28

$.32

$.31

Actual

$.35

$.33

$.34

$.31

Click to enlarge

These figures are showing that GE is a strong candidate to purchase based on the divided. This is from the large cash and revenue position in comparison with the total amounts of debt. However, medium term growth will be challenging because of the inconsistency in earnings. As a result, investors should be vigilant of these trends in earnings. Once there is a rebound in the quarterly earnings per share is when the firm will be attractive.

PepsiCoyields 3.20% and has a forward price earnings ratio of 14.09. The balance sheet includes $64.50 billion in revenues, $3.54 billion in cash and $26.85 billion in debt. The company has profit margins of 9.91%, operating margins of 15.66% and a return on equity of 29.30%. The dividend payout ratio is .477. The earnings of the company have been rising over the last three quarters. This is after falling from December 2010 to March 2011 (see below).

PepsiCo Earnings per Share

December 2010

March 2011

June 2011

September 2011

Estimate

$1.04

$.73

$1.21

$1.30

Actual

$1.05

$.74

$1.21

$1.31

Click to enlarge

These figures are highlighting how the firm has the ability to continue paying strong dividends to shareholders. This is based on the strong revenues and cash position in comparison with the outstanding debt. The company has been focused on this objective through the higher returns on equity and operating margins in contrast with the profits. However, the high forward price earnings ratio, low profit margins and unstable earnings means that investors should watch the next quarterly earnings report. If the trend of the last three quarters continues, then the stock is an attractive candidate for seeing long term growth and dividends. This is the key is when looking for consistency in the earnings per share growth

Merckyields 4.40%. The firm has profit margins of 8.84, operating margins of 25.87% and shareholder equity of 7.62%. The dividend payout ratio is 0.464. The balance sheet includes $47.85 in revenues, $15.58 billion in cash and $18.15 billion in debt. In the last year the earnings have been rising and then flattening out (see below).

Earnings per Share for Merck

December 2010

March 2011

June 2011

September 2011

Estimate

$.83

$.84

$.95

$.91

Actual

$.88

$.92

$.95

$.92

Click to enlarge

These figures are illustrating how Merck is a good buy for the dividends. This is from the strong revenues and cash position in comparison with debt. The flattening out of earnings is a sign that medium term growth will be more challenging. This is based on the lower profit margins and return in shareholder equity in contrast with sales (i.e. operating margins). As a result, investors should purchase shares only for the dividend or wait for earnings to consistently increase.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: The analysis of the above companies should be used as a starting point for any kind of further research.